Macroeconomics

2.0 System of National Accounts

0. Introduction

Scholar's say national income accounting dates back to either: William the Conqueror's 11th century 'Doomsday Book' of England or William Petty's 17th century Political Arithmetick, arguably the later result of his initial survey of Ireland after Cromwell's' conquest or Francois Quesnay's 18th century Tableau économique (Economic Table or what today is called the input-output table of an economy).  In fact, it was not until 1944 that the concept became an accounting reality.  

Discussions during World War II between the United States, the United Kingdom and Canada resulted in the framework and rules for what became the System of National Accounts.  Discussions drew on extensive statistical development in the United States by:

  W. C. Mitchell who established the National Bureau of Economic Research and was a member of the American Institutional School of Economics;

Joseph Schumpeter's statistical work on business cycles; and,

especially, Simon Kuznets work on national income. 

Such statistical evidence and analytic tools were used to erect the most extensive accounting system in human history.  The dream of Physiocrat Frenchman Francois Quesnay was finally realized.  

From these streams of thought the System of National Accounts (SNA) was born with Canadian statisticians as midwife.  In 1947, the United Nations issued standards for national SNAs together with associated sub-sets such as the Standard Industrial Classification, Standard Commodity Classification, et al.  They are used by all Member States today including the European Union.  In  addition the Census of Population and the Business Enterprise are consistent with these definitional standards.

A parallel U.N. system of  'material balances' (SMB) was adopted for Second World countries, i.e. the 'command economies' of Communist Nation-States.  Without the price system and its information richness the system failed. The U.N. no longer publishes the 'material balances' manual.  Having studied the Soviet economy I will offer some additional insights in my lecture.

With respect to the Standard Industrial Classification there are three major sectors to the economy: Primary, Secondary & Tertiary.  The Primary or the Extractive Sector includes farming, fishing, forestry and mining accounting for 5% of Canadian GDP.  The Secondary or Manufacturing Sector accounts for about 25%. The Tertiary or Service Sector accounts for about 70% of Canadian GDP.   Essentially the Service Sector involves intangibles including financial transactions, e.g., fees for 'wealth management' as well as virtual goods, i.e., software programs.  As the Covid Pandemic and NATO/Russian War demonstrates, increasing GDP through the Tertiary or Service Sector cannot buy PPE (personal protection equipment including pharmaceuticals) or 155mm artillery shells without the necessary Secondary Manufacturing infrastructure.  This should lead to a refocusing on the ‘Real Economy’ involving tangible outputs of Primary and Secondary Industries.  It should be noted that Western economies have suppressed Primary Industries and off-shored manufacturing in pursuit of the so-called 'Green Dream'.

1. Gross Domestic Product (MKM C 5 - all editions)

GDP is the aggregate total of all final goods and services produced within a country measured in dollars and cents per unit time.  It is generally considered the best available measure of the productive capacity of a Nation-State, and, in turn, GDP per capita (per person) is commonly accepted as a primary measure of the overall well-being of a Nation-State's citizens.

In the Standard Model it is assumed:

• first, all factors of production are ultimately owned by households including share ownership of all firms;

• second, only 'final goods & services' are included to avoid double counting, i.e., it excludes goods & services firms buy from one another and used as 'intermediate' inputs to their own production process;

• third, Government buys goods & services from firms.  Government produce nothing itself, everything is privatized; and,

• fourth, GDP always equals Gross Domestic Income (GDI) - the aggregate earnings of domestic factors of production such as capital, labour and natural resources.   GDP ≡ GDI is thus an accounting identity.

Alternatively, Gross National Product (GNP) is the aggregate total of all final goods and services consumed within a country measured in dollars and cents.  The essential difference with GDP is imports, i.e., goods and services not employing domestic factors in their production.  Most economists accept GDP but  Adam Smith, among others, believed GNP more accurately measures the well being of a nation. 

i - Concepts

To track GDP requires three basic concepts: Stocks, Flows and Equality of GDP & GDI.

 a) Stocks & Flows (measured in dollars and cents per unit time)

A stock is a quantity that exists at a moment in time.  A flow is a quantity added to or subtracted from a stock. 

i - Capital & Investment

With respect to GDP:

Capital (K) refers to the stock of plant, equipment, buildings, inventories of raw materials, semi-finished goods and housing stock;

Depreciation (D) refers to the decrease in the capital stock resulting from wear and tear; and,

Investment (I) refers to the flow of new capital where gross investment is the total flow of new capital and net is the flow of new capital less depreciation

ii - Wealth & Income

With respect to GDP:

Wealth refers to the stock of all property - moveable and immoveable, tangible and intangible - including financial assets; 

Income (Y) refers to the flow of money earned by supplying factors of production; and,

Disposable Income (Yd) refers to gross income less net taxes (total taxes minus transfers from Government to households)

iii - Consumption & Saving

With respect to GDP:

Consumption (C): refers to disposable income spent on final goods & services, and,

Savings (S) refers to disposable income minus consumption equalling an addition to wealth.

b) Equality of Gross National Income (GNI) & Expenditure (GNE) (measured in dollars and cents per unit time)

In an open economy the Standard Model engages 4 actors: households, firms, government and the rest of world operating in three markets – factor, goods & services and financial markets (P&B Fig. 22.2; R&L 13th Ed Fig. 1-4).  The flows involved include:

e) Why Expenditure & Income Approach to GDP?

While GDP and GDI must be equal they are calculated using different sources.  Expenditure data are collected by Statistics Canada using the Census and surveys while income numbers are collected by Revenue Canada using tax data.   This allows Stats Canada to check one against the other and introduce (and explain) any error term to ensure the identity.

iii - Price Level and Inflation (MKM C6 - all editions)

As will be seen (5.2.1 Money) dollars and cents are the most useful measure of economic activity.  For example, you can't compare apples and oranges but you can compare their prices.  Nonetheless dollars and cents measurement has its problems.  These include price inflation and deflation. 

For example, if the price of a chocolate bar goes up you still get only one at the new price.  For purposes of GDP, measured in dollars and cents, there has been an increase but there is no corresponding increase in the number of chocolate bars.  Overtime the discrepancy between monetary or nominal GDP and real GDP measured by the number of chocolate bars plus of all other goods & services grows ever wider. This makes knowing if the economy is growing, shrinking or stagnating difficult.